Spectrum Policy - Who's Micro-Managing Who?

The current debate concerning the spectrum auction provisions in the House bill that would restrict the FCC's authority to limit auction participation and to impose extraneous conditions might seem confusing. Confusing, that is, absent some appreciation for the proper roles of Congress and the FCC, along with some appreciation of the FCC's problematic track record of imposing conditions for the sake of attempting to achieve some predetermined auction result.

Here's an example of the way that the discussion can become confused, especially with regard to misguided claims regarding who's micro-managing who. In the February 8 Communications Daily [subscription required], Steve Berry, President of the Rural Cellular Association, arguing against the House bill restrictions, said that Congress does not need "to micro-manage a market which is, to say the least, dynamic and changes as quickly as the technology changes."

Mr. Berry, whom I respect, is only half-right – the half of his statement that acknowledges the wireless market is dynamic and changes quickly as technology changes is surely correct. But the half that suggests Congress would be micro-managing the market by restricting the FCC's authority to limit auction participation and to encumber the auction with extraneous conditions surely is wrong.

As I said in a January 17 blog, "Implementing Spectrum Incentive Auctions," it is not micro-managing for Congress to make certain high-level policy decisions concerning the auctions. More specifically, with regard to the restrictions in the House bill, I said:

"It is one thing to say that Congress should not 'micromanage' FCC auction design, or 'inappropriately' restrict the FCC's flexibility. But it is another thing entirely to say that it is improper for Congress to make certain high-level policy decisions about the conduct of the auctions.

It is most certainly within Congress's prerogative, and, indeed, perhaps even within its responsibility, to make such high-level policy decisions in authorizing the incentive auctions. While Mr. Genachowski suggests that Congress should delegate absolute discretion to the FCC with respect to conduct of the auctions, after all, it is Congress, not the FCC, which ultimately is accountable to the people.

[S]urely matters such as preventing the FCC from imposing new net neutrality restrictions or from restricting eligibility to participate in the auction to certain bidders - the very matters Mr. Genachowski wants to reserve to the FCC - fall into the category of high-level policy decisions that are appropriate for Congress to make."

So, to be clear, what the House bill proposes is not to micro-manage the FCC auctions. To the contrary, it proposes to prohibit the FCC itself from micro-managing the auction process by encumbering it to the likely detriment of consumers and taxpayers. This is a very important distinction.

There are good reasons why Congress, in the exercise of its policymaking function, might want to prevent such FCC micro-management. For example, Congress likely is aware that the FCC's previous exercises in micro-managing auctions by way of favoring certain entities or excluding others did not turn out well. The PCS spectrum auction intended to favor certain "designated entities," such as the ill-fated NextWave. This resulted in valuable spectrum going unused for many years as the courts sorted out the FCC's mess. And the FCC's more recent experience with trying to micro-manage the 700 MHz "C" and "D" spectrum blocks resulted, on the one hand, in a loss of billions of dollars in foregone revenue to the U.S Treasury (that is, to U.S. taxpayers) and, on the other hand, in an ineffective plan to utilize spectrum for public safety purposes.

Another good reason for Congress wanting to prevent FCC micro-management is the fact that, as Mr. Berry acknowledges, the wireless market is, "to say the least, dynamic and changes as quickly as the technology changes." Not only is the wireless marketplace fast-changing, as Robert Hahn and Peter Passell point out in a recent post, but it is "an amazing place" that has delivered immense consumer benefits. Like many others, they point out that "charges for both voice and data use have been falling even as reliability and geographic coverage have been improving."

In recent actions, the FCC has indicated its disposition to constrain or somehow limit additional spectrum acquisition by AT&T and Verizon, while favoring spectrum acquisition by others. For example, the ad hoc merger condition imposed by the FCC in the Harbinger/SkyTerra deal restricting transfer of spectrum to AT&T and Verizon and the agency's handling of the proposed AT&T-T-Mobile merger are to this effect. And the general tenor of the two most recent wireless competition reports, refusing to find the wireless marketplace competitive, also is to the same effect. As Messrs. Hahn and Passell rightly suggest: "The risk here is that freezing the industry leaders in place while giving competitors indirect subsidies (in the form of less-than-competitive prices for spectrum) would slow innovation."

Given this risk, and the FCC's pro-regulatory disposition as evidenced by its recent actions, it is entirely appropriate, as I wrote in my January 17 piece, for Congress to establish broad policy restricting the FCC's authority to limit auction participation or otherwise encumber auctions by imposing extraneous conditions. If you wish, you might call this policy-setting "macro-managing" the auctions. But it is not micro-managing them.

Properly understood, Congress would be constraining the FCC from exercising its unbounded discretion under the indeterminate "public interest" standard to try to micro-manage the auction rules, or, for that matter, the license transfer process, on the theory that it is somehow creating "more" competition. This manipulative approach, as the FCC has yet to learn but should have, rarely works to the benefit of consumers in markets as dynamic and already workably competitive as the current wireless marketplace.

In such markets, the FCC shouldn't be allowed to try to manage competition by micro-managing the regulatory process.        

    

FCC Should Remove Outdated Section 652 Restrictions on Cable Operators and CLECs

On January 31, the FCC approved Time Warner Cable's merger with Insight Communications. The FCC concluded that economy of scale and other efficiencies likely resulting from the deal would be in the public interest.

Insight provides competitive telecommunications service in addition to cable video services. Section 652 prohibits mergers involving competitive local exchange carrier (CLECs) absent consent of local franchising authorities (LFAs) such as city or county governments, at least in certain circumstances. But uncertainty exists over whether Section 652 applies specifically to cable operator/CLEC mergers. In the case of Time Warner/Insight, only two LFAs were at issue. And the FCC ultimately deemed Section 652's LFA-approval provision waived.

The FCC's waiver decision in Time Warner/Insight makes sense, as far as it goes. But when it comes to Section 652, the FCC should go even further. As I explained in an FSF Perspectives paper from August, the "Section 652 Cross-Ownership Ban Shouldn't Apply to Cable Operators and CLECs." The FCC now has before it petitions seeking declaratory or forbearance rulings on this point.

There are good reasons for concluding that Section 652 was never meant to apply to cable operator/CLEC mergers. In my Perspectives paper I also explain why there are no good reasons for giving LFAs a veto on such deals. (The 2010 Comcast/CIMCO merger, for instance, involved some 274 LFAs.) As my paper concludes:

If Chairman Julius Genachowski is serious about regulatory reform and directing the FCC's resources to "identifying outmoded or counterproductive rules," the Commission should address Section 652 without delay. One way or the other – through a declaratory ruling or regulatory forbearance – the FCC should make clear that Section 652's unnecessary regulatory restrictions do not apply to mergers between cable operators and CLECs.

WSJ's Crovitz on Wireless and Spectrum Auctions

For a succinct overview of what's at stake in the current debate over federal spectrum policy for the future of wireless innovation and economic vitality, look no further than L. Gordon Crovitz's Wall Street Journal column for today on "Spectrum Dinosaurs at the FCC."

With wireless broadband data demands rising and wireless carriers transitioning to 4G networks, a coming "spectrum crunch" stands in the way. Congress is closer to approving voluntary incentive auctions to be conducted by the FCC that would free up badly needed spectrum. But as Crovitz explains, "[t]he question now is whether the FCC will have an open auction, a rigged auction, or miss this window to have any auction."

FSF President Randolph May discussed this same issue in his January blog post, "Implementing Spectrum Auctions." Crovitz's column now makes the case for an open, market-driven and consumer-welfare oriented spectrum auction. Read it from start to finish.

Saying NO to Maryland's New Tech Tax

Remember Maryland's ill-fated computer services tax? State officials wanted to cover the state's budget deficit by tapping a new revenue source. The tax was unpopular and never took effect.

But the idea of taxing innovation and economic efficiency has now been brought back to life in the Maryland legislature. The newest tech tax targets? Online remote sales and digital downloads.

Back in 2007, the Maryland legislature stuck computer services with a 6% sales tax rate. The tax was quickly rammed through the legislature in a special session, without public debate, and signed into law by Governor Martin O'Malley. This triggered an immediate backlash from businesses and everyday citizens. Public officials who supported the computer services tax backpedaled and soon caved. It was repealed just a handful of months later.

Unfortunately, the Governor and some in the Maryland legislature seem to have forgotten the lesson. This month bills containing Governor O'Malley's proposed budget were introduced in the Maryland Senate and House (SB 152 and HB 87). If enacted, the proposed budget would extend the 6% sales tax rate to downloaded "digital products" of several stripes, such as music, videos, books, ringtones, and more. It would also impose sales tax collection obligations on remote (that is, out-of-state) online retailers that have website ad commission sales arrangements with Maryland residents. This means that online retailers with no physical presence in Maryland would charge the 6% sales tax rate on purchased goods and remit the money collected to Maryland tax officials.The lesson of the computer services tax is that policymakers shouldn't harm businesses and consumers with tax burdens on hi-tech services that are crucial to optimizing beneficial solutions and cost efficiencies. By enabling businesses and consumers to order goods from remote retailers through the Web or to download products directly through the Internet, broadband networks offer the benefits of convenience and increased speed. Such technology also reduces delivery and transaction costs. This makes digital e-commerce platforms economic force multipliers.

These tech tax provisions in the proposed budget will, of course, place direct and indirect burdens on all those using Internet-related technologies. But there are some particularly problematic aspects to the current budget proposal's targeting of e-commerce.

For starters, language included in the current budget proposal is overbroad. Definitions and provisions relating to "digital products" appear to subject to taxation, not just digital products downloaded in business-to-consumer transactions but also digital products downloaded in business-to-business transactions. This would create multiple taxation problems that tax laws typically protect against. Here, the result of compounding taxable events would be increased costs to businesses for inputs. And those costs surely will be passed on to consumers in the form of higher prices for outputs.

As a matter of tax policy, the budget proposal's treatment of remote online sales is counterproductive. It would likely generate little revenue, and it could cause Maryland residents to lose business.

The budget proposal would impose sales tax collection obligations on remote online retailers that have website ad commission sales arrangements with Maryland residents.

More specifically, it would attach tax collection obligations to remote online retailers that have web advertising affiliate agreements with in-state residents. Under such agreements, online affiliates typically place ad banners on their websites for goods sold by retailers like Amazon and Overstock.com. The affiliates receive a small commission when buyers click on the ads and purchase such goods.

But if this provision regarding online remote sales is adopted by the Maryland legislature and signed by the Governor, it would likely backfire. Significant numbers of Maryland residents with ad banners for remote retailers on their websites would find their ad affiliate agreements cancelled. As a study released by the Maryland Comptroller in November states, "[r]eportedly over 200 companies including Overstock.com and Backcountry.com have terminated their affiliates in one or more states that have enacted affiliate-nexus laws." And so the state would lose its trigger for imposing sales tax collection obligations on online remote sellers. (For more detail, see my FSF Perspectives paper from November, "Taxing Ad Affiliate Internet Sales Would Be Maryland's Mistake.")

For that matter, imposing tax collection obligations on out-of-state retailers likely violates the U.S. Constitution’s interstate Commerce Clause. Current U.S. Supreme Court jurisprudence recognizes Congress as the authority to address interstate e-commerce taxation matters.

Even if these glaring defects of the Governor's proposed budget were to be corrected, there are still good prudential reasons for Maryland to think twice before imposing sales taxes on digital downloads and on purchases from remote online retailers. Consider, for instance, the adverse effects of such taxes on Maryland's business climate. The just-released Tax Foundation's 2012 State Business Tax Climate Index once again places Maryland near the bottom compared to other states with respect to its business climate. Maryland (#42) must avoid doing further damage to its competitiveness vis-à-vis its neighboring states, such as Virginia (#26), Delaware (#12), and Pennsylvania (#19). According to the Comptroller's study, none of those three neighboring states currently impose taxes on digital goods. And both Virginia and Delaware already have lower general sales tax rates than Maryland.

Characteristics of digital age technologies only heighten the need for Maryland to make itself a competitive place for businesses to start-up or relocate to. Such technologies are highly portable. Therefore, it is not difficult of purveyors of digital goods to relocate to states without growth-inhibiting taxes and regulations.

The Governor and the Maryland legislature shouldn't repeat the sorry history of the computer services tax. Making up for budget deficits by taxing innovation and economic efficiency doesn't make sense. Putting a priority on fiscal responsibility and cutting wasteful spending does.

Mr. Genachowski, Tear Down That Potemkin Village - Part II

Yesterday I posted a blog suggesting that FCC Chairman Julius Genachowski's regulatory reform efforts were more of a Potemkin Village than real. I pointed out that he continues to cite the elimination from the FCC's books of the "dead letter" and Fairness Doctrine – a dead letter for a quarter century -- and other dead letter regulations as regulatory reform achievements, even though it is clear that these rules were not being enforced. 

According to Communications Daily [subscription required], an FCC spokesman responded to the critique by stating: "Other reforms include the agency-wide transition from paper to electronic filing, a reduction in the FCC backlog and the closing of 999 dormant proceedings." 

Exactly my point. Like eliminating dead letter rules, transitioning to electronic filings, reducing backlogs, and closing dormant proceedings is not an unworthy exercise. I give Mr. Genachowski credit for these matters. But there is no mistaking these "good housekeeping" reforms for tackling existing or proposed substantive regulations that have significant economic impacts and which do not pass cost-benefit muster. 

It is meaningful substantive regulatory reform of this type that I had in mind when I said, "Mr. Genachowski, Tear Down That Potemkin Village."

Mr. Genachowski, Tear Down That Potemkin Village

As Communications Daily reported in its January 19^th edition, President Obama recently gave the FCC a "shout out" for supposedly cutting 190 regulations, citing the FCC's efforts as a prime example of regulatory reform under his Administration. The same Communications Daily item reported that Cass Sunstein, head of the Administration's Office of Information and Regulatory Affairs (OIRA), credited the FCC with eliminating the Fairness Doctrine and other regulations. 

Please! Hold the shout outs. 

Truth be told, the FCC's regulatory reform efforts thus far are more a Potemkin Village than anything else. 

First, the claim about eliminating the Fairness Doctrine. FCC Chairman Julius Genachowski has highlighted "purging the Fairness Doctrine from our books" as a regulatory reform achievement so many times it's become a bit old. Both Mr. Genachowski and Mr. Sunstein know better. 

In May 2011, FCC Commissioner Robert McDowell pointed out in a speech, no doubt to the surprise of most FCC cognoscenti, that the Fairness Doctrine was still codified in the Commission's rules. Shortly thereafter, in a June 6 letter, Chairman Genachowski wrote to Rep. Fred Upton, Chairman of the House Energy and Commerce Committee, stating that the Fairness Doctrine "has been a dead letter at the Commission for more than two decades." In the same letter, Mr. Genachowski said the FCC General Counsel had advised that the Fairness Doctrine is "unenforceable." 

Again, on August 22, 2011, Mr. Genachowski stated in a Commission release that striking the Fairness Doctrine "from our books ensures that there can be no mistake that what has long been a dead letter remains dead." 

There are many other statements to the same effect. 

I don't have a problem giving credit to Chairman Genachowski for striking the Fairness Doctrine rule from the FCC's books. But I do have a problem with using a rule that Mr. Genachowski admits is "unenforceable" and a "dead letter" -- indeed, a rule that has been a dead letter for a quarter of a century -- as an exemplar of regulatory reform. 

Enough already with burying long dead dead letters. 

As Communications Daily reported in a follow-on item on January 23, many of the other rules eliminated by the FCC fall into the category of Potemkin Village regulatory reform. Among those eliminated are the Broadcast Flag rule held unlawful years ago by the D.C. Circuit court, eight regulations relating to a no longer operative version of the Public Utility Holding Company Act of 1935, and thirteen relating to a no longer operative mechanism allowing a TV station to allege that a satellite operator unlawfully transmitted the television station's signal. 

Excising rules from the FCC's books that are no longer operative is not an unworthy exercise. But it is not real regulatory reform. And it should not be touted as such. 

Meanwhile, when presented with pleas to engage in meaningful reform, even of the modest variety, the Commission generally demurs. Even a casual review of the FCC's Public Notice, released on December 23, 2011, (the eve of Christmas Eve), shows how difficult it is to persuade the agency to reduce or eliminate outdated regulations. The Public Notice contains the recommendations from the Commission's various bureaus and offices regarding the biennial review of telecommunications regulations required by Section 11(a) of the Communications Act, added by the Telecommunications Act of 1996. This section requires the FCC to review every two years regulations that apply to any provider of telecommunications service to determine whether any such regulation "is no longer necessary in the public interest as the result of meaningful economic competition between providers of such [telecommunications] service." 

While the FCC staff recommended the Commission consider repealing a few regulations that no longer have any relevance in today's environment, such as Computer III CEI/ONA requirements, for the most part it demurred. And, with respect to various regulations relating to wireless providers, it declined to recommend the repeal or modification of any rules at all, despite the competitive marketplace in which wireless providers operate. And despite the fact that Section 11(b) of the Communications Act states that the Commission "shall" repeal or modify any regulation it determines not to be in the public interest. Not "may" repeal or modify. 

So, in the interest of fairness, it's time for Chairman Genachowski (and President Obama and Administrator Sunstein) to stop citing elimination of the Fairness Doctrine as an example of regulatory reform accomplishment. You can't keep killing and counting "unenforceable, dead letters" over and over again. 

It's time for the FCC to get serious about meaningful regulatory reform. There are plenty of existing regulations that no longer make sense in today's competitive marketplace environment, but which nevertheless impose significant economic burdens. They should be eliminated, or at least cut back. 

And there are others, which the Commission is proposing to adopt, even now, which it should not adopt. For example, the Commission should scuttle its proposed video navigation device design mandates, the proposed expansion of program carriage rules, any further actions regarding special access regulation, and the extension of network outage reporting requirements to Internet providers. 

A little over a month ago, I wrote an essay that ended this way: "Mr. Genachowski, build back that wall." There I urged resurrection of the policy, especially after adoption of net neutrality mandates, that digital broadband services should be walled off from regulation.

In a similar vein, and with all respect, my plea here is: "Mr. Genachowski, tear down that Potemkin Village."

Happy Birthday, Everett

By Deborah Taylor Tate

Happy Birthday to my dear friend and fellow MMTC Board member, Everett Parker, born today, January, 17, 2012. Not many of us will ever reach our 99th birthday. Even fewer will have the generational impact upon vital and complex communications policy discussions that Everett has had – and continues to have. But most importantly, Everett also translated thoughts into action: strategically, energetically, and effectively. Thank you for your years of public service – most often for the poor, the voiceless, and the forgotten.

Happy Birthday, Everett, and I am honored to have had the opportunity to know and work with you at the FCC and beyond!